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Discounting when income is stochastic and climate change policies

  • Boyarchenko, Svetlana
  • Levendorskii, Sergei

We introduce stochastic income into the standard exponential discounting model and study dependence of effective discount rates on the type of the underlying stochastic process and agent's current income level. If the income follows a process with i.i.d. increments effective discounting is exponential. If the income follows a mean reverting process, the shape of discount rate curves depends on the margin between the agent's current income and the long-run average. The model is used to study how the willingness to pay for investments in abatement technologies depends on the current wealth of a country.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27998.

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Date of creation: 02 Nov 2010
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Handle: RePEc:pra:mprapa:27998
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